Market Turning Points

TIME FOR A PAUSE

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for all time frames through a 3-dimensional approach to technical
analysis: Cycles - Breadth - P&F and Fibonacci price projections

"By the Law of Periodical Repetition, everything which has
happened once must happen again, and again, and again -- and not capriciously,
but at regular periods, and each thing in its own period, not another's,
and each obeying its own law... The same Nature which delights in periodical
repetition in the sky is the Nature which orders the affairs of the earth.
Let us not underrate the value of that hint." ~ Mark Twain

Current Position of the Market

SPX: Very Long-term trend - The very-long-term cycles are down and,
if they make their lows when expected, there will be another steep and prolonged
decline into 2014.

SPX: Intermediate trend - The current action suggests that a wave "C" from
1075 is underway and, after a short consolidation, has resumed its uptrend.

Analysis of the short-term trend is done on a daily basis with the
help of hourly charts. It is an important adjunct to the analysis of daily
and weekly charts which discusses the course of longer market trends.

Daily
market analysis of the short term trend is reserved for subscribers. If you
would like to sign up for a FREE 4-week trial period of daily comments, please
let me know at ajg@cybertrails.com.

Market Overview

In the last newsletter, I looked for a resumption of the rally and, once again,
the market obliged! After a final dip to 1203 last Monday (my projection for
a low on the SPX was 1200-1205), the index took off and closed the week at
the high of the move, rallying 62 points!

My Point & Figure analysis had indicated an initial pause at 1251, but
when it became obvious that the index wanted to go higher, 1263-1265 came
into play. Since the SPX closed at 1265 on Friday, we have to assume that
the move is probably done, although the momentum may cause it to spill over
into some weak count up to 1270. This will be determined when the market resumes
trading.

What normally follows the realization of a projection, is a wave of profit-taking
which causes temporary supply and a pullback in prices. I expect a near-term
peak to be reached, perhaps as early as Tuesday. Correction from that level
should be short-lived, but could last a few days. If I tried to forecast a
retracement level at this time, I would be guessing. I will not be able to
give a correct estimate until the move has been completed.

Of all the indices, the DJIA has had the strongest rally. It overcome its
October 28 close by thirty points and its December close by nearly a hundred
points. This may encourage some additional buying after the holiday. If so,
the SPX would follow suit and rise above its December intra-day high of 1267.
This is why we need to wait until Tuesday to put a price on the rally top.

Last week's market action is bullish in itself, but possibly even more bullish
is that, by overcoming its October and December tops, the DJIA is giving some
credibility to the potential inverse Head & Shoulders pattern which formed
over that time frame. (We'll analyze this and other technical factors next,
in the Daily Chart of the DJIA.) My projection for the entire rally
from 1075 is at least 1293. If this turns out to be the top of minor wave
2, as is expected by many EW analysts, it should be followed by a serious
decline. If it is not, the appraisal of the longer-term structure will have
to be revised.

Chart analysis

We'll start by focusing on two important channels which will be vital in determining
the sustainability of the DJIA uptrend.

First, is the green channel, which delineates the trend from March 2009. In
the decline from the April high, the index briefly violated the bottom line
of that channel, but subsequently had a good rally which took it up to the
channel median. After pulling back from that level, the DJIA collected itself
and is now attempting another move beyond the median resistance. At best,
the entire pattern from the low remains neutral until it can do this successfully.

There is another (red) intermediate channel which will be even more important
in determining the fate of the DJIA over both the short and longer terms.
The most bullish interpretation of that channel is that it represents a prolonged
sideways consolidation of the index after its run from March 2009 to May 2011.
And the price action within that channel is bullish. After breaking below
the median in August, and consolidating for several weeks, the Industrials
came roaring back substantially above it, and has maintained its position
in the upper half of the channel.

Last Friday, the index closed at its highest level since the October low,
and looks as if it intends to challenge both the top of the red channel, and
the median of the green channel. Should it be successful at punching through
both of these trend lines, it would be a very bullish development.

Because it is currently overbought near-term and because a top is likely to
form next week, its chances of accomplishing this feat right away are small
but, if the ensuing correction is not severe, it will have another chance
to do it early in the new year.

Turning to the indicators: there is plenty of momentum showing in the MSO,
but the MACD is lagging and showing some negative divergence. If it has not
made a new high by the time that the MSO is ready to give a sell signal, an
intermediate top will probably have formed.

The market is at an important juncture, and its short-term performance could
alter the negative verdict that many analysts have already rendered.

We'll now look at the SPX 60m Chart. Since the 1203 bottom, the index
has been in a powerful short-term move which, as of Friday, still did not
show any deceleration in the price momentum. But the A/D indicator, which
has not kept up with the price, is telling a different story. Divergence in
the A/D combined with an overbought momentum index will have a limited upward
life span, especially since the lower projection has already been met.

The SPX formed a nice basing pattern just before it ended its decline and,
on Friday, the minimum 1265 target projected from the base was reached. The
index could still try to go to the upper range of that projection and get
nearer to 1270 early next week, but the entire base count of 1292 is not likely
to be met until sometime in mid-January.

I have drawn channels which encompass the price progression. They may require
some fine-tuning as we go forward, but it's unlikely that the lower channel
line will be challenged until after 1294 has been reached.

Cycles

There are minor cycles bottoming in January, but the one which could keep
the correction going after the 1294 count is filled is the 14-15-wk cycle
due at the beginning of March.

Breadth

The Summation Index (courtesy StockCharts.com) has turned up for a second
time before going negative -- as well as its RSI. It's likely that it will
not challenge the former index high of about 780, but there could be enough
upside momentum to drive the RSI into overbought territory.

Sentiment

The SentimenTrader (courtesy of same) has changed little from the last
long-term reading, but there was a substantial drop in the short-term index,
suggesting that a near-term top is probably at hand.

The VIX

This is a Weekly Chart of the VIX. It is making a pattern that can
only be interpreted as intermediate term bullish for the stock market. The
price pattern that it is currently making is very similar to the two earlier
ones, both of which signaled the beginning of an intermediate correction.

The current intermediate sell signal is confirmed by the MACD which is not
only accelerating on the downside, but is also about to go negative and breaks
its long-term uptrend line.

Assuming that nothing changes in the current trend, the bottom oscillator
may give us a clue about the time required for the VIX to get back into an
uptrend. For the first down-phase, it took about a year for the MSO to show
some positive divergence from the time that it first became oversold (green
area). The second time took about nine months.

The MSO became oversold once again a week ago. It is not unreasonable to assume
that in this third phase, it will take the indicator about six months to get
back into a buy position. That would mean that the current bullish trend of
the stock market could continue until about June, 2012.

When I first took a P&F count of the VIX, I took the most conservative
one and came up with a projection down to 21. This was filled last week. However,
considering that there is still no sign of impending recovery in the indicators,
it is likely that it will go lower. There are two more counts that are valid:
one down to 18, and one to 12. Since the index has a solid base at 15, the
third count looks excessive. But, considering the current chart pattern, 18
looks very reasonable and, when reached, could be followed by a long basing
period as it has done in the past.

BONDS (TLT)

The assumption that the VIX has given an intermediate sell signal -- which
suggests that the bullish trend of the market could continue for about another
six months -- would have more validity if it were confirmed by other indices.

The next chart is a Weekly Chart of TLT which is reproduced on the
same time scale as the VIX above. There is no question that TLT is much stronger
than the VIX, but its entire chart pattern has a strong similarity to that
of the VIX. If the move which started in July 2011 (at the same time as the
final uptrend of the VIX) is over, and TLT were about to give a sell signal,
the similarity of patterns would continue as TLT starts an intermediate correction.

In fact, this correction has probably already begun! Both indicators say so,
starting with negative divergence in the indicators before they turned down.
The MSO always precedes the MACD, so we can assume the latter is also ready
to start a downtrend. As for the price pattern, it looks as if TLT has just
tested its recent high successfully, and is beginning to roll over. The MAs
have not yet given a sell signal, and the price is still trading within the
up-channel, but it's probably only a matter of time before it moves out of
it.

Should this happen, and should TLT begin an intermediate correction in tandem
with VIX, we would have the confirmation that we need to suggest a continuation
of the bullish advance in the stock market.

UUP (Dollar ETF)

Two of the three contrary indicators are possibly suggesting that the market
will see more strength before it makes a top. What about the third indicator,
the dollar? Below is a Weekly Chart of UUP. Once again, the peaks and
troughs come at approximately the same time (in an inverse manner to the equity
indices), which makes this chart similar to -- if not exactly with -- the
other two.

In order to confirm the VIX pattern, UUP would now have to roll over in preparation
to forming a base for the next few months. Is this possible?

Certainly possible! The index is in a long-term downtrend channel and recently
bounced off the lower trend line. It has gone as far as the (dashed) median
where it is apparently running into resistance. Note that the second short-term
peak stopped at the intersection of the median and a smaller down-channel
which has formed within the larger one. The weekly MSO became overbought,
corrected, and is now beginning to show divergence. The MACD is still in an
uptrend.

In order for UUP to confirm what the other two appear to be saying, it will
have to stop its advance and begin to roll over. If the MSO drops below the
small horizontal red line and breaks its uptrend line, it will give a sell
signal. If it does and TLT declines further, both indices will be in sync
with the VIX. Let's see if this happens!

Summary

The SPX, as anticipated, has resumed its uptrend and, presumably, what is
currently acknowledged to be wave "C" of minor 2. Although a near-term top
should be reached in the next couple of days, the eventual target for this
move is about 1294.

The type of correction which takes place after 1294 is reached will be very
important. If the VIX pattern has been interpreted correctly, and if it is
eventually substantiated by the other two contrary indicators, 1294 will only
turn out to be a temporary stop on the way to higher prices, and this may
force us to re-evaluate the validity of the theorized A-B-C corrective pattern.

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The above comments about the financial markets are based purely on what I
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view which might be of interest to those who follow stock market cycles and
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